The Market Today

SOTU; Iowa Debacle; Coronavirus Continues to Grow


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Coronavirus Update: The number of confirmed cases rose from 17,391 to 20,673 overnight.  The number of reported deaths rose from 362 to 427, including a second death outside of mainland China in Hong Kong.  The growth rate of confirmed cases has slowed from approximately 35% to 16% overnight, but the number of cases continues to grow at an accelerating pace.  To see a our Coronavirus Chartbook, please click here.

And It Begins… with a Debacle; and SOTU: The President’s State of the Union address is scheduled for tonight. He is expected to layout his campaign message touting a strong economy.  In the first primary caucus, Iowa was a mess last night. A winner has yet to be announced amidst technology problems with the voting processes. Reports indicate the vote tally is not expected until Tuesday. The debacle likely cost Sanders the chance to make a triumphant victory speech to national observers (presuming the pundits’ speculation about vote tallies are correct).  Interestingly, Biden reportedly appears to be close to the 15% statewide viability threshold. 

Factory Orders Report and Business Investment: In today’s economic news, the December Factory Orders report is expected to show a strong rebound from an ugly November showing.  The Durable Goods Orders report for December will also be finalized.  The initial estimate gave a discouraging picture of business investment in the short-term future.


YESTERDAY’S TRADING

Stocks Recovered as Investors Contemplated Coronavirus: Despite continued virus uncertainty, U.S. stocks recovered nicely Monday from Friday’s steep decline as global markets outside of Asia perked up and an updated glimpse into the U.S. manufacturing sector showed surprising strength in January. Despite Chinese stocks falling nearly 8% in their first day back from a weeklong Lunar New Year holiday break, European equities rebounded 0.3% to start the week despite continued growth in the number of infected and the first virus-related fatality outside of China. Treasury yields had also recovered higher with stocks as sentiment firmed, with both making new highs following the ISM’s latest update (more below), which may not fully capture effects of the outbreak, which showed manufacturing had picked up more than expected after trade tensions eased into the signing of the phase one agreement.

Yields Dropped as Persistent Uncertainty Dragged Down Oil: However, yields pulled back quickly after the CDC confirmed a person-to-person infection in California and noted it was undertaking pandemic-like preparatory measures. Adding to the downward pressure, oil prices crashed into a bear market on growing fears that weaker demand from China could overpower any supply-side action OPEC might take. Despite reports that OPEC could meet sooner than expected to discuss emergency production cuts, U.S. WTI fell 3% and closed below $50 per barrel for the first time since January 2019. Energy companies within the S&P 500 were Monday’s clear underperformers, limiting the index’s gain to 0.7%. The retreat from the daily highs was most severe for longer Treasury yields, leaving the 2-year yield up 4.0 bps, the 10-year yield just 2.0 bps higher, and the related spread back near the low end of a two-month range.


OVERNIGHT TRADING

Stocks Strengthen in the Face of Coronavirus Cases Crossing 20,000: Global investors, in a sanguine mood on Tuesday, have bid global equities higher despite China’s virus statistics showing more deaths and confirmed cases and Hong Kong reporting its first related death. Chinese stocks bounced back more than 2.5% after slumping nearly 8% on Monday, leading gains across the continent that pushed the MSCI Asia Pacific index up 1.2% to break a string of eight consecutive declines. China’s central bank again made a large liquidity injection to ease uncertainty’s strain on the economy and markets. The market tone has remained firm in Europe where the Stoxx 600 was 1.2% higher midday. At 6:30 a.m. CT, U.S. futures had followed global equities upwards and were higher by more than 1%.

Other Asset Classes Echo Improved Market Attitude: The effects of improved sentiment were also evident across other assets classes overnight. The Japanese yen pulled back with gold while crude prices recovered a portion of yesterday’s steep drop to trade back above $50 per barrel. Some top leaders from OPEC are expected to meet today to discuss any potential actions to shore up pricing amid fears of weaker global demand because of the virus. Treasury yields were leading global bond yields higher for a second day, pushing through yesterday’s highs that broke down amid cautious comments from the CDC about the virus. At 7:15 a.m. CT, the 2-year yield was up 4.8 bps to 1.40%, the 5-year yield had added 5.7 bps to 1.40%, and the 10-year yield had risen 5.5 bps to 1.58%.


NOTEWORTHY NEWS

Surprisingly Strong ISM Received Cautiously Amid Virus Uncertainty: The ISM’s Manufacturing Index was broadly stronger to start 2020, although the recent worries about China’s coronavirus cast a shadow over the results. The headline index jumped from an upwardly-revised 47.8 in December to 50.9 in January, a six-month high and much better than the expected 48.5, showing activity had picked up more than expected on easing trade tensions. New orders rose from 47.6 to 52.0, the first expansion since last July and the strongest since May 2019. Employment contracted for a sixth month, although the pace of decline slowed. Current production notched the biggest gain, jumping 9.5 points to match its best level in 10 months. Just before the ISM report was released, Markit revised its January PMI up to 51.9, reflecting less slowing to start the year than initial estimates. While the ISM’s strength avoided compounding market fears of a virus-induced global slowdown, the optimistic results will be taken cautiously until uncertainty around the degree of economic deterioration related to the coronavirus abates.

ICYMI – January 2020 Monthly Review: Before the ink had dried on December’s upbeat market results, sentiment soured after U.S. tensions with Iran escalated and a deadly virus spread throughout China and leaked into other countries around the world. Yields dropped after the U.S. killed a top Iranian military official in Iraq and fell rapidly following the identification of the new virus that has killed hundreds and infected thousands. While the novel coronavirus so far appears more contained to mainland China than the SARS outbreak of 2003, there is growing concern that the economic impact could be more severe considering China’s increased importance to the global economy. The worries overwhelmed the signing of the trade deal, a Fed meeting, the Senate passing the USMCA and setting the stage for President Trump’s impeachment acquittal, and the U.K. formally exiting the EU more than three years after the initial referendum. The 2-year yield slumped 26 bps to 1.31%, the 10-year yield sank 41 bps to 1.51%, and the 3-Month/10-year yield spread inverted for the first time since October. Oil prices sank more than 15% on global demand worries and China’s yuan weakened to a seven-week low. Click here to view the full recap.


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